Investment advice for high income couple

[juniormonkey]

Hello! Let me say that the MMM blog & these forums have changed my life. I was blind and now my eyes have been opened. You guys are awesome!

I wanted to post about our situation here and get some advice from senior mustachians. Both me and my wife are 27 years old and earn about $140k each.
We already max our 401k and HSA accounts. Our employer matches 9% for 401k. We don't have any loans.

I wanted to open a taxable investment account to invest our savings. We have about $10k now and are able to add $5k each month.

Should I go with vanguard or betterment for this? How should I structure my investments? I am confused and am just thinking of putting everything in VTI at this point.
Also, we are in the 28% tax bracket.. So will tax loss harvesting done by Betterment make up for the fees charged by them?

Thanks,
Junior

[Interest Compound]

We are also a high-income couple. We save over $10k a month. You know what the best part of investing is? The answer to the how to invest question stays the same, no matter how much money you have! :)

Here's my quick go-to response for anyone asking for investing advice. Short and sweet. You ready?

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I recommend going with Vanguard. Vanguard is like the Credit Union of investment firms. They are owned by us, the people who invest with them:



As a result, they have become the biggest investment firm in history. Seriously. They have over 3 trillion dollars in assets under management. Why haven't you heard of them? Look at the graphic above again. They operate with just enough profits to cover their costs. In other words, they aren't spending millions of dollars every quarter on fancy advertisements, they aren't buying big billboards in downtown manhattan, and they aren't paying for thousands of sales people in hundreds of offices across the country to create brand awareness. They are legally obligated to operate with our best interests in mind, which is why they are the only company I'd trust with my money.

From there I'd recommend one of two options:

1. "I want Vanguard's experts to do everything for me. I'll just tell them my age and they'll put it in the appropriate Target Retirement Fund"

2. "I want Vanguard's experts to do everything for me. I'll just tell them how much risk I want, and they'll put it in the appropriate LifeStrategy Fund"

Both of these options invest solely in "index funds". This means they aren't trying to bet on what the next "hot stock" will be, they're just buying everything. Here's what the experts have to say about that:

• A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth. ~Warren Buffet
• Most investors would be better off in an index fund. ~Peter Lynch
• Only about one out of every four equity funds outperforms the stock market. That's why I'm a firm believer in the power of indexing. ~Charles Schwab
• Most investors should simply invest in index funds. ~Robert Rubin, Former Secretary of the Treasury
• Over the long-term the superiority of indexing is a mathematical certainty. ~Jason Zweig, senior writer for "Money"
• Indexing virtually guarantees you superior performance. ~Bill Bernstein, author, financial adviser
• The smartest thing people can do if they want money in the equities market is buy an index fund and forget about it. ~Elliot Spitzer, NY Attorney General

Vanguard's Target Retirement Fund is a perfect long-term investment, because it combines the blue line and the orange line, into one package. When you're younger, it adds more of the blue line when you want more risk, and as you get older it adds more of the orange line to keep you safe from crashes:



You can throw money at it for the rest of your life, and you'll be just fine. Why would you want to choose your risk with Vanguard's LifeStrategy fund? Maybe you're saving money for a house downpayment in a 5 years, or your job situation is unstable, and don't want to take on much risk.

You can't go wrong with either choice :)

P.S. If you're more of an advanced investor, and since you have many 401k accounts, you probably are, look into the Three Fund Portfolio, and the principles of Tax-efficient fund placement:



Enjoy!

[ysette9]

I believe the general consensus is that Betterment is not better in the long run since the benefits of tax loss harvesting diminish over time, and leave you with a basket of messy stocks that are later hard to clean up if you want to switch to something easy like an index fund.

We all will vote for Vanguard.

Next you need to determine what you are saving for. Is it a down payment for a house in the next couple of years? If so, best to keep it in something like cash, a monkey market account, or a short-term bond fund. If this is your retirement stash, then you can and should take more risk. What your asset allocation should be should be based on your risk tolerance. Search on the Vanguard website for a portfolio tool that walks you through a series of questions and then makes a recommendation.

You can also dump everything into VTSAX or a combo of that and VTIAX and let your money grow while you read the JL Collins stock series and the Boglebeads wiki investment startup kit to educate yourself.

[chasesfish]

My opinion is as long as you're saving and investing, you're splitting hairs on whether you go with Betterment or Vanguard. 

You just need to commit to saving every month, then do it. 

[Car Jack]

I'll vote for door number 3.  Both you and your wife open Schwab accounts.  Get a bonus for opening each.  Then choose ETFs.  I do this with SCHB. (US broad market.....a large number of Dow components that mostly follow the S&P 500.  ER is 0.03% and you don't get bogged down with Vanguards dwindling capability to help customers).  The keys I remember with ETFs.  Don't buy/sell unless the market is open (spread is much larger when the market is closed) and when you do sell, you can pay long term cap gains rather than regular income if held for a year.  You'll pay tax on the dividends but you save money over similar mutual funds.  You could instead buy VTI at TDAmeritrade, if you must do Vanguard.  You'll get the Vanguard ETF without the horrible customer service to deal with and TDA will also give you a bonus to open an account with them.

[2Birds1Stone]

Wow, good advice so far BUT....


......at $280k/yr you are paying a SHIT TON of taxes.

I would be MAXING both 401ks, HSA, Backdoor Roth, and any other tax deferred options available through your employer. This will not only force you to save more but you will save a TON on taxes.

After you have done these accounts to the max, add an additional $3-5k/month into taxable.

We earn much less than you and max out two 401ks, 2 Roth IRA's, 1 HSA, and still manage to save $2k/month in taxable.

You are doing great!!

[ysette9]

I would be MAXING both 401ks, HSA, Backdoor Roth, and any other tax deferred options available through your employer. This will not only force you to save more but you will save a TON on taxes.

We already max our 401k and HSA accounts. Our employer matches 9% for 401k. We don't have any loans

We are a high income couple as well, earning more than you in fact, though we are a bit older (nicely done on the career progression, btw!) and understand completely where you are coming from. We also don't have a mortgage to write off any interest, and Little Ysette9 didn't help our taxes last year. :) The fact is that we (and you) are extraordinarily blessed. That just means that we will pay a fair amount in taxes since putting away that firs $36K in 401(k)s is nice but isn't the bulk of the savings we will do each year. I believe there is another thread around here in the Taxes subforum where someone asks about how to minimize taxes as someone with high income and nothing much else going on. The bottom line is that there isn't much you can do unless you want to give a bunch to charity or have a lot of losses in your investments.

Personally we are with Vanguard and are socking away all of our taxable savings into a combo of VTSAX and VTIAX. Our target is 60% US/40% International based on advice we got from Vanguard. We do hold some bonds in our tax-advantaged accounts, but not too much. If you aren't sure, I think it wouldn't hurt to do something along the lines of us and spend the interim educating yourself until you feel you have enough knowledge to make tweaks. Good luck and congrats on being in such a great position.

[bryan995]

I would be MAXING both 401ks, HSA, Backdoor Roth, and any other tax deferred options available through your employer.

We too are in a similar situation. Maxing two 401ks, 2 tIRA and then the rest is temporarily in cash for a down payment.   Since we (and the OP) are above the income limits for tIRA deduction or any direct ROTH contributions, taxable seems to be the only option after 401k/hsa.

In my case, the tIRA through betterment would be considered a taxable investment (above limit for deduction), I may stop doing this next year.

Why suggest a backdoor ROTH here? My understanding is to wait on backdoor roths for when income drops. Otherwise you are paying a top marginal rate for the conversion now, during high earning  / accumulation phase.

Better to start a ROTH conversion ladder once RE has begun or while you are winding down into RE (much lower income/taxes). I plan to use taxable accounts or cash etc to fund the first 5 years of RE, while the ROTH conversion ladder is getting set up.

[2Birds1Stone]

I would be MAXING both 401ks, HSA, Backdoor Roth, and any other tax deferred options available through your employer.

We too are in a similar situation. Maxing two 401ks, 2 tIRA and then the rest is temporarily in cash for a down payment.   Since we (and the OP) are above the income limits for tIRA deduction or any direct ROTH contributions, taxable seems to be the only option after 401k/hsa.

In my case, the tIRA through betterment would be considered a taxable investment (above limit for deduction), I may stop doing this next year.

Why suggest a backdoor ROTH here? My understanding is to wait on backdoor roths for when income drops. Otherwise you are paying a top marginal rate for the conversion now, during high earning  / accumulation phase.

Backdoor Roth is great, you are already paying taxes on those funds on when your employer cuts you a check.

Backdoor Roth is pretty much a taxable account at that point where the future growth is tax free. You can do up to $5,500 this way per year.

[bryan995]

I see - thanks!

Put 5500 into 2 x tIRA each year (after tax money). Then convert via backdoor ROTH. No taxes owed on conversion since this was after tax money.

So 401k ($18,000), tIRA -> rIRA ($5500), HSA and then the remainder into taxable accounts :)

[2Birds1Stone]

Yup!

[Indio]

I've found that Schwab also has low expense ratio index funds similar to Vanguard. They also offer services similar to Betterment. Market competition has led many of the online trading companies to diversify their financial services.

[DenverGal]

Congrats on doing so well professionally!  I appreciate this thread.  I'm a one person household with an income not quite at your level (but close), so this thread of information is helpful.  Great forum!

[juniormonkey]

OP here. This is a pretty late reply, but I wanted to thank you folks for the advice.

I decided to go with Vanguard for taxable investments. I have setup all the other good advice in this thread for tax deferment. Just finished setting up backdoor ROTH.
For taxable investments, I have put everything into VTSAX for now (until I can learn more and figure out my investment strategy).

Thanks again!

[ysette9]

Congrats on the good moves! VTSAX is a good place to park your funds while you do more self-education. We have all of our Vanguard funds in a mix of VTSAX and VTIAX (the international version of the total stock market). Our asset allocation is around 60% domestic, 40% international per the advice of the Vanguard rep we spoke to a couple of years back. People around here have varying feelings about international market diversity, but it makes me happy.

[ZiziPB]

My vote would be to go with either Vanguard or Fidelity.  I personally use Fidelity because they are the administrator for my work-related accounts, so it makes my life easier to use them for taxable and IRAs.   Their website is great - lots of info and helpful tools.  They have low cost index funds comparable with Vanguard, and if you want to buy ETFs, you can do it all in one investment account (I believe that at Vanguard you have to set up a separate account for mutual funds and a separate one for ETFs and other securities that can be traded). 

[Cat_Race]

A little off topic, but me and SO are in a similar earning situation.  Best thing we've done to "reduce" taxes (keep at a minimum) is to avoid the marriage route.  Saves us from paying a ~new Honda Accord to the government ever year!  Look into the marriage penalty, you may not be as offended as we were but it is good to be aware.  We'll tie the knot after FIRE, before kids.

As for investments: confirm your company will "true-up" your match if you max your 401k early - that will potentially change your strategy. My company does, so I just maxed out 2017 on my last paycheck. SO's does not, so he keeps it rolling for his match for the entire year.  401K/HSA/Backdoor Roth>then Taxable. I like Vanguard, and just went through transferring my Betterment assets in-kind to Vanguard.  Note they only transfer full shares, and getting the cost basis updated in Vanguard is a bit of a bear, but the relief in expense ratio is AWESOME.

Best of luck.

[MustacheAndaHalf]

One reason for Vanguard not mentioned yet is their low-cost tax-exempt bond funds.  I like their ETF in particular, Vanguard Tax-Exempt Bond ETF ("VTEB") that charges 0.09% annual fees.  Where Total Bond has a 2.4% yield, Vanguard's tax-exempt bond offers a 2.2% yield.  By itself might not be a reason to switch, but is a good offering.

Higher income people tend to be clustered in New York and California - both of which have high state taxes.  Vanguard offers CA and NY tax-exempt bond funds.  By only purchasing municipal bonds from a single state, those two funds offer income that is exempt from Federal and state tax.  Might be worth looking into, but also be aware all of your bonds are also invested in your home state, which isn't ideal for diversifying investments.

Most people I talk to don't know about the high-income marriage penalty.  Essentially the tax on married filing jointly starts out the same as two single people (with the same salary).  But the upper edge of the 25% bracket is $91,150 for single people and $151,900 for married filing jointly.  So two single people can stay in the 25% bracket up until $182,300 but a married couple enters the 28% bracket at $152,000.
https://www.irs.com/articles/2016-federal-tax-rates-personal-exemptions-and-standard-deductions

Betterment is not equivalent to Vanguard.  Betterment adds 0.25% in fees for their services, while Vanguard doesn't take $25/year out of every $10,000 of your assets.  When your index funds have grown for several years, even a market correction isn't enough to put them into a taxable loss.  Over time tax loss harvesting matters less and less as new contributions make up less and less of your portfolio.